It seems to me as if the Boohoo (LSE: BOO) share price has become the investment the market loves to hate. The stock has been on a consistent downward trajectory for much of the past year. In fact, after falling consistently for 12 months, shares in the fast-fashion group have slumped nearly 75%.
However, the firm has consistently reported sales growth over the same period. According to its latest figures, sales increased 20% year-on-year for the quarter ending August 2021.
So what has been going on? Why has the stock continued to fall despite its improving fundamental performance? Could this be an opportunity for investors like myself to snap up a share of this enterprise at a discount price?
Boohoo share price challenges
I think there are three main reasons why the market is giving the business the cold shoulder despite its growth. First of all, the cost of doing business for the group is rising.
The firm recently reported that profits for the current fiscal period would come in below expectations due to higher order returns and rising costs. This is not what the market wants to hear from a former high-flying growth stock.
Secondly, I think the firm is still working to rebuild its reputation with investors. After being accused of underpaying staff and poor practices in its supply chain, some investors are clearly wary about being exposed to these risks. I should note that the business has spent a tremendous amount of time and effort trying to rectify these issues. That is one of the reasons why profits have been under pressure.
Thirdly, it looks to me as if the Boohoo share price is just too expensive. Even after recent declines, shares in the company are dealing at a forward price-to-earnings (P/E) multiple of 18. FTSE 100 peer Next, which has a far better reputation in the City, is selling at a forward P/E of 13.6.
I think all of these factors are weighing on Boohoo shares. Unfortunately, I do not believe the cost pressures and other challenges outlined above will go away any time soon. These headwinds are the biggest threat to the company’s growth outlook right now.
Undervalued opportunity
Still, as I have noted before, the stock appears cheap compared to its potential over the next decade. As I covered in this article, if the company can grow earnings at 10% per annum for the next decade, earnings per share could hit 14.3p by 2032. Even at a sector average P/E multiple of 13, this gives a potential price target of 186p.
Of course, these are just projections. Still, I think they show the company’s potential over the next couple of years. With this being the case, even though I think Boohoo will continue to face significant challenges over the next couple of years, I reckon the stock looks cheap compared to its potential.
That is why I would buy the shares for my portfolio as a speculative investment today.
